Monetary Reform and Anti-Imperialism, or Why War Protesters and Free Bankers/Gold Bugs Should Join Forces

One of the interesting things about the Ron Paul candidacy has been the reaction to two of his most controversial proposals: withdrawing US troops from Iraq (and elsewhere) as soon as possible and returning to the gold standard or some form of private money. The right, of course, howls with derision at the former, while the left (and some on the right) do the same at the latter. What few if any seem to realize is that these two positions have a deep and important historical connection:

If you want to make it harder for the US to act like an imperialist bully you need to find ways to reduce the resources available for it to do so. Getting the state out of the money creation business eliminates its ability to manipulate the monetary system to raise funds surreptitiously for the war machine.

When I taught money and banking, I used begin the history of the American monetary system section by asking my students what the following dates in US history had in common: 1812-1816, 1863, 1913, 1971. The obvious answer is "times of war or close to it" (and if you count the Great Depression as a metaphorical war in the eyes of politicians, you could add 1934), but the answer I was looking for is "times of increased federal involvement in the monetary system." That those two answers overlap is no coincidence. For hundreds of years, governments have intervened in monetary institutions for the purpose of using them as a way to raise revenue via the manipulation of money and credit, and most often that revenue has been for the making of war.

Fighting wars requires resources. Governments have only four ways to raise revenue: sell off assets, borrow, tax, or inflate/maniuplate the monetary system. If we assume that states interested in making war are also ones interested in accruing power, selling off assets is unlikely. Both borrowing and taxing have their limits. If governments try to sell war bonds, they better have buyers and that assumes that the populace is in general agreement the conduct of that war. World War II bonds sold, but I don't recall any Vietnam War bonds, nor do I see any Iraq War bonds being available for purchase. Raising taxes to fight a war also requires at least some public agreement with the policy as tax-raising politicians may well be voted out if the war is unpopular. For politicians, the downside of raising taxes (like the downside of conscription) is that it is an obvious and painful grab for resources by the warfare state. It would much rather be able to raise the necessary resources in a way that is much less obvious and therefore has less potential for political conflict. Enter the monetary system.

Governments that can either create money directly themselves or that can regulate banks in ways that force the banks to provide the resources are going to be able to conduct war more often and with less political resistance than those who can't. Take the 1863 date. As I noted in an earlier comment, that year was the federal (Union) government's first attempt to offer charters for individual banks (the earlier years were the demise of the First and rise of the Second National Bank of the United States). With charters came regulations, one of which was the requirement that banks wishing to issue currency back it with US government bonds. This regulation created a guaranteed market for such bonds, which in turn enabled the Union government to have revenue to fight the Civil War. On the more directly inflationary side, President Johnson's decision to finance Vietnam through inflation let to the massive flow back of Federal Reserve Notes from foreign governments which began to reduce US gold holdings in the late sixties. This process led to the closing of the "gold window" in 1971, ending the last remaining link between the dollar and gold and ushering in the even greater inflation and macroeconomic disorder of the 1970s and 80s. One can tell similar histories about the creation of central banks and other forms of governmental involvement in banking in other countries across the globe. The need to fund war and empire has been behind the creation of many a central bank. It's easier to pay for bombs and bullets if you have the equivalent of a printing press at your fingertips.

Because inflation's costs are normally dispersed, subtle, and longer-term, politicians find it a politically more palatable way to raise revenues, especially for unpopular causes. This point is even more important because politicians play up the very short term benefits of inflation as if they were a panacea for a stalled economy. Persuading the public to accept those ephemeral and small short term gains without an understanding of the long-term costs is part and parcel of the general deception often used to promote empire-building wars. Proposals such as those associated with Ron Paul that would de-monopolize the government's control over money creation would significantly help reduce its ability to finance the warfare state (not to mention the various other things that government does that could be done better by civil society or the private sector). It's fine and dandy to protest the war in a whole variety of ways, but making institutional changes that would deprive the warfare state of its supply of resources will be much more effective than "Honk if you hate war" signs outside the Post Office or voting for the "we favor the war slightly less than the other guys" party.

It's most interesting that arguments for the gold standard and arguments for (near) immediate withdrawal from Iraq are both considered "crank" views, but normally on opposite sides of the political spectrum. When they come together in one candidate or in one set of (libertarian) ideas, the crank factor seems to expand geometrically. However, I would argue that folks on each side need to see why these are a logically related pair. I would especially encourage those on the left who are opposed to the war, and to US imperialism in general, to get by their first reaction to Paul's arguments about monetary reform and see how they can be seen as part and parcel of his, and libertarianism's more general, opposition to US military adventurism. The best way to reduce the warfare state is to find ways to starve the beast. Some form of the gold standard or free banking would be a great start.

More Comments:

Robert Higgs -
11/13/2007

As the editor of a journal who must frequently turn away submissions from cranks, I am not inclined to argue that cranks don't exist. But don't take my word for it: just peruse nearly any set of comments posted at Web sites focused on economic or political matters.

Yet, I must admit that I myself hold beliefs that most economists or political scientists would certainly condemn as cranky. It seems that, as a rule, public dismissal of claims or claimants on grounds of crankiness denotes little more than disagreement combined with an attempt to kill the messager along with the message. I am reminded of the careless way that, in certain circles, every political action or idea one despises is denounced as "fascist." (Although I sometimes describe certain things as fascist myself, I try to do so with conceptual precision foremost in mind.)

So, yes, in the present context, the Establishment intellectuals no doubt consider those of us who espouse an immediate U.S. military withdrawal from Iraq or the adoption of a gold standard or free banking as cranks. I think it is appropriate, however, to ask: just what have the Establishment intellectuals themselves given us over the years? The collection of social, political, and economic horrors that might be listed in response to this question seems to me to suggest that the leading lights who casually and quickly dismiss currently unfashionable ideas as cranky have an undeniable history of living in glass houses.

Robert Higgs -
11/12/2007

In this splendid post, Steve well encapsulates the conclusions one might reach more laboriously by reading the three-volume collection WAR FINANCE, edited by Larry Neal (Edward Elgar, 1994), which contains almost 1,800 pages altogether. Having absorbed this mass of analytical and historical material, which covers the past couple thousand years of experience, one will never again doubt that the history of warfare, the history of government monetary manipulation and inflation, and the history of taxation are, insofar as their landmark events are concerned, the SAME history.

This evidence is an important part of the larger body of evidence that demonstrates, as fully as historical evidence can demonstrate anything, that a free society is incompatible with frequent or large-scale engagement in war. A free society simply cannot coexist for long with the warfare state or the welfare state (the latter being merely a state of war in which the government attacks a segment of its "own" population, rather than foreigners, hence also a warfare state of sorts).